1 posts categorized "Bond ratings"

December 25, 2012

Evidently, not everyone is happy when RPU doesn't raise its utility rate.

Last week Moody's Investors Service downgraded Rochester's electric utility bond rating to Aa3, down from Aa2.

Here's part of the explanation of why RPU's grade went down:

The rating action reflects the lower credit metrics over the last few
years, which is at least partly due to the fact that there have
been no rate increases in the last few years and none are expected in
2013. There have also been declining sales of off-system
power.

The rating action also reflects the heavy reliance on one
generation or fuel source; namely, Southern Minnesota Municipal
Power Agency's (SMMPA, rated A1) 41% ownership of the
Sherco 3 coal-fired plant, which remains out of service due
to a failure during re-start in November 2011 following a routine
shut down for maintenance.

Having said that, the Aa3 rating
reflects the benefits of a long-term take and pay contract with
SMMPA under which SMMPA has agreed to sell and deliver electric power
to Rochester, and Rochester has agreed to take and pay for electric
power as needed for the operation of its system up to 216MWs. The
contract expires in 2030.

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The rating also reflects Rochester's local rate
setting authority without state oversight. Rates are set at levels
necessary to cover operating and maintenance costs and 120% of
debt service. Rochester also benefits from a strong service area
economy.

On the flip side, Moody's sees a lot of positives at RPU.

*RPU is a well-established enterprise with a long, stable
operating history and good liquidity.

*RPU's service area is economically sound with a highly educated workforce
and low unemployment.

*The likelihood of deregulation in Minnesota is diminished.
RPU has exclusive control over its service territory.

*RPU has local rate-setting autonomy (City Council approval
is required), with no state oversight.

RPU also has a few challenges, according to Moody's.

*RPU's take-and-pay contract with Southern Minnesota
Municipal Power Agency (SMMPA, rated A1) accounts for majority of
its supply and limits its overall fuel diversity. There are other
sources of power in RPU's owned generation: the 105MW coal-fired
Silver Lake Plant (set for decommissioning in late 2015), the 80MW
gas-fired Cascade Creek Plant and two hydro units as well as diesel
generation for peaking purposes. However, most of the power
source comes from the SMMPA contract for 216MWs.

* Although RPU as local rate-setting authority, RPU has
not raised rates its rates for several years, at least partly due
to concerns about competitiveness. This has resulted in some decline
in the credit metrics over the last few years.

*RPU has concentration risk; its top 10 customers represent 35.1%
of the total kWh sales in 2011 and 32.2% of revenues in
2011.

*Transmission constraints are forecast for 2014 and beyond,
which RPU plans to address through participation in CapX 2020, a
regional effort to build transmission lines in Minnesota.